Edited version of private ruling

Authorisation Number: 1011580002778

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Ruling

Subject: Rental property interest

Are you entitled to a deduction for interest on a rental property mortgage which is covered under a Salary Sacrifice Agreement (SSA)?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

Your mortgage payments on your residential home were paid by your employer under a SSA.

You moved out of your residence and it then became a rental property.

The SSA continued for the mortgage payments after it became a rental property.

No information was provided by your employer regarding whether the interest payments would be deductible to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for losses or outgoings to the extent to which they are incurred in gaining or producing assessable income except where the losses or outgoings are of a capital, private or domestic nature, are incurred in gaining or producing exempt income or are prevented from being deductible by a provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).

Broadly, interest on money borrowed to purchase an investment property may be allowable under section 8-1 of the ITAA 1997 for the period during which the property is rented out at a commercial rate or is available for rent at a commercial rate.

However, section 51AH of the ITAA 1936 operates in your circumstances to prevent such a claim.  According to that section, where a taxpayer:

· has an obligation to pay an amount to a third person in respect of an outgoing 'incurred' by the taxpayer

· the taxpayer's employer makes a payment to 'discharge' the taxpayer from that obligation, and

· the payment constitutes a fringe benefit or a benefit which would be a fringe benefit if it were not an exempt benefit

any deduction that would have been allowable for the employee in respect of the outgoing must be reduced by the amount of the payment.

In your situation you have incurred the expenditure. Whilst there is no statutory definition of 'incurred', it is broadly taken to mean that you incur an outgoing at the time you owe a present money debt that you cannot escape. However, in your case the direct payments that your employer makes to the financial institution as part of your SSA 'discharge' you from your obligation to pay the amounts you have incurred; and the payments match or exceed the amount of the outgoing that would have been deductible under section 8-1 of the ITAA 1997. Therefore, you are prevented from claiming any part of the interest on your investment property loan as an income tax deduction.

While we accept that you were not aware of the implications of continuing the SSA after you rented out the property, it remains your responsibility to ensure you are fully informed of the ramifications of your arrangements. The law does not provide the Commissioner with the discretion to allow a claim for a deduction that is specifically denied.

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